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Wednesday, September 05, 2007

endless summer? I don't think so

So now we have slipped past the dog days of autumn and begin down the slippery weeks of summers end. Labor day has passed, a wonderful weekend with a poker game to kick it off and some great boat rides blasting up the Chester River under clear blue skies enjoying the company of friends and all the great things that make up this last three day weekend of summertime. In the interest of editing we will leave out the part of the story that involves whiskey, ex-wives and angry dogs (who knew dog bites hurt that much or got that infected? My leg has colors in it that were never part of any rainbow I ever saw). Only two summer weekends left (keep in mind we are on the red yes calendar around here. Final bikini contest. End of Summer). Thoughts turn back to work and markets as volume returns to the street and begins to reassess exactly where we are as far the direction of the economy and stock market.

It remains a pretty mixed picture as of this moment in time. In the beige Book released today the fed stated that there was little economic turmoil outside the real estate markets. That’s like saying outside of those very large fang marks on it, your leg is fine, Mr. Melvin. What it doesn’t say of course is that the real estate market is huge in this country and the source of most people’s personal wealth. To say nothing of all the real estate agents, mortgage brokers, and associated jobs that will be lost in a real estate slump. Of course there is still the 800-pound gorilla of all those mortgage resets coming up. Even if many of these borrowers could qualify for a loan in the new environment, they could never afford the new payments.

Sounds bad doesn’t it? Maybe we need a rate cut to soften things up a bit, make a few more bucks available to smooth things out. But Wait. There’s more. As any person who eats food, buys gas or clothes or any other type of goods can tell, prices are rising across the board. Pretty much most raw materials are up near new price highs. We are a service economy so pretty soon service providers will raise the prices they charge so they too can continue to buy food, gas and all the other fun stuff we need to get through the day. The dollar is in a free fall against just about all currencies right now (this is causing me particular distress as the price of scotch has jumped 20% in the last month). Higher raw materials and energy costs? How can we lower rates in the face of these events?

Glad I am not fed Chairman right now. If he doesn’t act, he will disappoint the financial markets and cause stock prices to fall. If he does, he runs the risk of creating a stagflation scenario. Somehow I do not see the markets embracing that very fondly either.

So what now? First admit that I probably should have bought the 1380-1400 are on cash SP 500. The few market-timing factors I like showed it as a buying point. But I felt then as I do now that the risks of such a move were not worth the potential return. My monthly price chart shows 55 months of rising prices. Do we really have a one-month sell off those retraces150 points of a 700-point move? We have risen 100% off the lows but a 20 day 10% decline is all we get. A fed injection heals an economy that had all the loose lending and bad deals that mark a frothy economy? Did think so then and don’t now. Caution makes a lot of sense to me.

I did pick up shares of mortgage concerns and reits that make commercial and business loans a few weeks ago. They had fallen, were well below book value and had real loans on real property that had not been diced and sliced into derivative securities. I felt that they could ride this wave out and corporate insiders agreed with me. Yields were north of 10% on all of them and they have risen slightly since. I think BRT, CSE, GSC, JRT and NRF are probably still buys. Can they go lower in the short term? Of course. Will they be a lot higher in three years? I think they will and I ll be collecting some fat dividends along the way. I picked up a few shares in FMAR. This fast growing bank in Baltimore trades below book as a result of their own mortgage mistakes but they have a good CEO who is buying stock. ADPT is still a net-net worthy of purchase as well. I think you also can still buy BERK, BHBC, EIHI and ESST.EDCI is too cheap not to buy given the NOLs lurking on the balance sheet waiting for someone to figure out how to turn them into real money. Those inclined to sell options should be having a blast right now as huge moves in volatility make for a lot of trading opportunities.

Let me reiterate that I am not a long-term perm bear. In fact I think the real estate issues are going to take some time to work through the economy and the stock market. When it is time to buy I think it will resemble 2001 and 02 as an incredible buying opportunity that generates a lot of long-term wealth. I look forward at that time to being a lot more aggressive, employing strategies like the value Line 1 and two under 10 dollar list, the yield and return on equity strategy. As a bonus as the lending markets churn, with wall Streets all too reliable habit of throwing out the baby with the bathwater, small local banks will get very cheap. Historically buying these little gems has been incredibly profitable when you get them below book and ender 10 times earnings. We are close here but not just yet. I am watching insider buying in this sector very carefully looking for a sign to increase my buying here. The time to jump in with both feet is coming. It is just not here yet.

So, summers gone and the flowers are indeed all dying. Or soon will be. But this gives a fall to look forward to. This just might be a good thing. Lets be honest, a few more fast boat weekends with the tic-tac kid and my knees and liver would both sue for damages. There is no better time to be a sports fan. College football, that glorious pageant of sport where one group of twistedly mutated young men takes on another and an entire states pride rests on the outcome of the contest. Already we have seen one of the greatest upsets in all of college ball history when Michigan was upset by tiny Appalachian State (search youtube for their recruiting video to understand just how small this school is. I have made better films on my phone. My phone, btw doesn’t have video. That’s how bad it is) We have determined that my Beloved Notre Dame is not very good. Okay, they are actually very bad and I am dreading the amount of crap I ll have to take from beachclub Boy Saturday when we play his Penn sate Nittany Lions. I hate my bet even with the 17 points. Pro ball starts tomorrow night with what should be a barnburner between New Orleans and The Colts. I have to say that the over at 52.5 looks like a good bet from here. The ravens look very good and there are some great story lines though out the league. As a bonus we can now watch football on ESPN and not have to listen to Michael Vick stories. There is something grand, glorious and uniquely American that encourages eating and drinking excessively while watching violent powerful men do violence to one another whilst slightly dressed beauties dance among them sinning sings of praise. Goes to Tim’s central theory of life. All things are better with partly to mostly naked women in attendance.

Baseball races are heating up. The Red Sox look to be waltzing into the playoffs, the Yankees have to play in against the mariners but this will be tough with the roughed up pitching staff. The orioles might avoid last place (although I would not bet much more than a can of warm Schlitz on this), the cubs are prime to break hearts again with their lead in danger now and the Brewers charging forward like hopped up Dartmouth freshman on a panty raid, Crossmans Indians look like a lock for the playoffs. There does exist a very strong possibilities of the only two truly evil baseball teams on the planet meeting in the world series and I will be faced with the prospect of having to spend the last week of October snarling and hurling savage curse at the screen as the red sox play the mets. Still it is a great time to be a sports fan. Hell, even NASCAR has the race for the chase coming. No Junior though so no one south of the mason Dixon line will watch it.

The pipe, the pipes are calling, from the docks and to the games.

Caution in the markets, sports on the tube. Green label Bushmills on order. No dogs in the immediate vicinity. Life is good.

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